S T E P T 0 E & J 0 H N SON LLP

ATTORNEYS AT LAW

Melanie Franco Nussdorf 1330 Connecticut Avenue. NW

202.29.3009 Washington. DC 20036-1795
mnussdorcIsteptoe.com Tel 202.429.3000
Fax 202.429.3902
steptoe.com

June 1,2005 .l- o

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Offce of Regulations and hiterpretations
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Attention: V oluntar Fiduciar Correction Program

Dear Mr. Doyle:

Weare submitting these comments on the Voluntar Fiduciar Correction Program (the "Program") on
behalf of financial institution clients who may be service providers and/or fiduciares to plans covered
by Par 4 of Subtitle B of Title I of the Employee Retirement hicome Securty Act of 1974, as amended
("ERISA") and section 4975 of
the Internal Revenue Code ("Code"), as well as individual retirement
accounts ("IRAs"), and other plans, accounts or arangements subject only to section 4975 of
the Code.
We appreciate the expansion of the Program and the opportty to submit comments on the changes.

1. The change in the definition of "Under Investigation". The curent VFC Program defines "Under
Investigation" to cover investigations by the Deparment of Labor Employee Benefits Securty
Administration (EBSA, formerly PWBA) pursuant to section 504 of
ERISA or under any crial
statute involving a transaction affecting tne plan. The proposed definition adds to these investigations
any investigation or examination by any other Federal agency in connection with a transaction involving
the plan. We think that this change is enormously, and perhaps unntentionally broad, and could, if read
literally, eliminate a signficant percentage of the bans and broker dealers who would otherwise use the
Program.

As you know, many bans, broker dealers and other financial institutions such as insurance companes
have been, and remain involved in ongoing investigations regarding such issues as fees, market timing
and late trading with respect to their products and services, including mutual fuds, insurance/anuity
contracts, and varous hybrid products. These are non-plan specific investigations. These investigations

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June 1,2005
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have occured simultaneously at both the federal and state levels. In addition, from time to tie, the
SEC initiates sweeps of large financial institutions which may relate to all clients, including plans. Most
bans are examned at least anually, which examations may extend for several months, by the Office
of the Comptroller ofthe Curency or the Federal Reserve Board. Any ofthese investigations could
involve a plan, since the transactions being investigated are common to lines of
business or market
practices, rather than client specific. Under penalty of perjur, however, it would be impossible for
virally all of these fiancial institutions to say that the transactions under investigation could not have
involved a plan. Accordingly, given these facts and based on the proposed amendments to the Program,
these institutions may not be able to use the Program, and hundreds of violations, perhaps coverig
thousands of plans, could go uncorrected, thwarting what we understood to be a primar purpose of the
Program: self-identification and investigation and prompt correction. We think this canot be what the
Deparment intends. The Program has caused many service providers to thoroughly "scrub" their
operations in order to include all possible violations in the filing, and has, in our view, done more for the
process of self-correction and institutionalization of controls than any initiative since ERISA was
enacted. It would be a shame to put an end to that process because of
the breadth of the Deparent's
proposed change in the eligibility rules for the Program, if those changes were intentionaL. Whle we can
understand that the existence of other federal investigations should be a disclosure item to the
Deparent (but not subject to general disclosure), we canot understand the remedial purose behind
closing the Program to anyone under any kind of investigation by a federal agency where the
investigated conduct could affect a plan, unless the investigation itself is plan specific. Finally, while
we understand that state and local investigations wil not be a bar to using the Program, we believe that
it would be helpful to clarify that the New York Stock Exchange, the National Association of Securty
Dealers and other self-regulatory organizations are not included as Federal agencies.

2. Credit for earnings actually received by the plan. In the new defition of Lost Eargs and in
the automatic calculator, there is no credit for what the purchased asset or the proceeds ofthe sold asset
actually earned (interest, dividends, etc.). We assume that this is just an inadvertent omission, since the
origial VFC Program provided for such a credit, and the preamble to the proposed Program does not
suggest that the Deparent has changed its view on this point. If, in fact, this omission was intentional,
in our view, omitting this credit would be unair where plans have actually enjoyed a fiancial benefit
from the paricular investment (and would signficantly diminish usage of
the Program) if there were no
credit available. In addition, the absence of a credit for the amount actually eared by the plan is entirely
inconsistent with both common law trst ànd Code section 4975 principles of correction, which, in
accordance with ERISA's legislative history and interpretation, should be read consistently to the degree
possible.

3. Purchase transactions which are corrected over time. hi some cases, a plan wil purchase a
readily tradeable asset (such as publicly traded stocks and bonds) from a par in interest without an
exemption, and wil then sell all or a par ofthe securties prior to the date of filing under the Program.
We believe it would be helpful to have an example that permits there to be more than one recovery date:
for example, the first, on the date that one portion of the assets were sold and the second, on the date that
the remainder were sold, with each portion corrected as required by the Program. We believe that the

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cleanest way to handle such a situation would be to treat the purchase of each portion as a separate
purchase (with its own Principal Amount) and ru each of those transactions through the calculations for
the Program separately for puroses of correction, calculation of Lost Earngs and determation of
Recovery Date(s).

4. Refilig Form 5500s. hi our experience, there are many times that the transaction, and the
correction, are an insignficant portion of the plan's assets. Nonetheless, the Program seems to indicate
that corrected Form 5500s must be filed in all cases. In our view, correction and refiing of
the Form
5500 is burdensome and expensive, especially where both the plan and the governent have been
officially informed of the transaction and the correction. We believe it would be very helpful to have a
de minimis rule, set fort in the Program which makes clear that unless the transaction constituted some
reasonable threshold (e.g., 25% or more) of the plan's assets, no correction needs to be made to the
previously filed Form 5500.

5. Investigations. The Program recites that the Deparent will generally not commence an
investigation with respect to a filing unless there is prejudice to the Deparent caused by the expiration
of the statute of limitations period, material misrepresentations, or signficant har to the plan or its
paricipants that is not cured by the correction under the Program. See Section 2(e). We are concerned
that this language would permt the Deparent to commence an investigation any tie the fiing relates
to transactions that are close to the general ERISA statute of limitations (six years), even where they are
being fully corrected. It is unclear whether, under the Program, if the Deparent does commence an
investigation after the filing but before a no action letter is issued, the Program wil be unavailable for
all of the transactions covered by the filing, and whether the corresponding exemption wil be
unavailable as well. We think this course of action could be very unfair to applicants who are filing in
good faith, and workig with the regional offces to make sure all transactions are fully corrected. We
believe the Deparent should be able to commence an investigation only where the applicant is
refusing to correct properly and the statute of limitations is in danger of expirg.

6. Repayment of Principal. Where a plan purchases debt in a nonexempt transaction, pricipal may be
paid back over time. It would be helpful if you could confirm that in a sale to a plan of an asset that is a
debt securty, the "Principal Amount" is treated as restored to the plan for all puroses on each date that
principal is repaid to the plan through payments on the debt securty. In paricular, the Principal
Amount should be treated as restored upon principal repayment (in whole upon matuty and repayment
of the entire outstanding principal balance and in par upon repayment of any portion of the pricipal
balance) for purposes of correction, calculation of Lost Earnngs and determination of the Recovery
Date.

7. Corporate Actions. The Program's online calculator does not deal with splits, tenders, mergers or
other corporate transactions or reorganzations. Whle we understand thät the calculator may not be able
to process stock splits, tenders and mergers, it would be helpful to confirm that the transactions must be
taken into account and must be taken into account manually.

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8. Cash settlement of recovery. Where a publicly traded security is involved in a nonexempt

transaction, the correction under the Program requires that the securty be repurchased for the plan
where the nonexempt transaction was a sale, or sold, where the tranaction was a purchase. Because
publicly traded securties are generally replaceable easily in the market, we believe that the correction of
a transaction involving such a security should be permtted to be "cash settled"; if the plan chooses to
purchase the securty, it can, and if it chooses to sell the securty, it can. We believe it serves no purose
for the plan to have to sell the securty it had purchased, only to buy it back again, or to buy a securty it
had sold, only to sell it again. Those trades would be disadvantageous to the plan and to the market,
leading only to unecessar transaction costs all around. In addition, there are certain instrents
which, if sold, canot be replaced, like certificates of deposit bearng higher coupons than are curently
available in the market.

9. IRAs and other Plans subject only to Section 4975. It has been our experience with fiancial
institutions that when they determine that plans covered by ERISA have been involved in a prohibited
transaction, the error that permitted that transaction to occur was repeated with IR accounts and other
Plans subject only to Section 4975. Because the Deparent has sole authority to issue exemptions,
there is no way for these accounts to avoid excise taxes other than through an exemption application to
the Deparent. The burden on the exemption staff of reviewing thousands of transactions in IRs and
other Section 4975 accounts makes it unlikely that these exemptions would be either quick, inexpensive
or effcient, thereby potentially limiting the kid of "wholesale" corrections that IRS and the Deparment
should want. We believe that with the cooperation of the IRS, the Departent could amend the Program
to permit IRs and other Section 4975 plans to take advantage oftheVFC Program, with the EBSA
field offces issuing a no action letter so that the servce providers can use the exemption process in the
most effcient maner. We understand that the field offices have no jursdiction over IRs and these
other accounts; it is our impression, however, that the most important questions in the filings are the
kinds of transactions and whether they were properly corrected. Where the transactions are common to
the ERISA plans and to the IRs and other accounts and have been corrected the same way, we do not
believe that adding the IRs into the fiing wil create signficant additional work.

We appreciate the opportunty to comment on the proposed amendments to the VFC Program,
and would be happy to answer any additional questions you may have.

Best regards,

Melanie Franco Nussdorf

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